On Monday, Brightcove announced they have entered into a definitive agreement to acquire privately held Unicorn Media at a deal valued around $49M. Unicorn will do between $8-$9M in revenue for 2014, so they are getting a valuation of about 6x 2014 revenue, on a business expected to lose $12M next year. The deal consists of approximately 2.9M shares of Brightcove stock and approximately $9M of cash and is expected to close sometime this quarter. Brightcove is also paying approximately $2M to certain Unicorn employees as part of a multi-year retention plan and has announced that as part of the acquisition, five Unicorn Media executives will have senior leadership positions at Brightcove.
While this deal makes sense from a technology integration point of view, Unicorn is losing a lot of money. The company did about $5M in revenue for 2013 and expects to grow that to between $8-$9M in 2014. The problem with the business is that Brightcove says that Unicorn will lose between $11M-$12M in 2014, which is a lot to lose on such small revenue. As part of this announcement, Brightcove has also announced preliminary fourth quarter and yearly revenue. Total revenue for the company in 2014 is expected to be $126M-$130M and they expect to lose $9M-$12M for the year.
Brightcove had been telling Wall Street they were going to end 2013 as a profitable company, but now they don’t even expect to be profitable in 2014. Wall Street was expecting Brightcove to be profitable this year, so naturally they aren’t liking this news and Brightcove’s stock closed down $2.98 a share, losing 20% of their value. Earlier in the day it was down 26% on the news. While Brightcove might have shown slight profitability for 2013 if they had not done the Unicorn acquisition, revenue growth would have been lower than expected. Brightcove’s rate of growth is slowing with their 2014 projected revenue putting the growth of their business at about 10% for 2014.
For those not familiar with Unicorn Media, the company sells a cloud based platform called Unicorn Once. It allows premium content owners to easily take one piece of video and deliver it to multiple screens and platforms and dynamically insert ads for VOD and live streams. The company’s CEO, founder and largest shareholder is Bill Rinehart, who formerly was the founding CEO at Limelight Networks and their CTO, AJ McGowan was also from Limelight Networks where he served as Director of Solutions Engineering. Customers I know who use Unicorn’s platform have spoken highly about it and Unicorn gets very high marks when it comes to support and service, but like all vendors in this particular segment of the market, Unicorn has had trouble scaling their business.
The company was founded in 2007 and six years later only grew revenue to $5M in 2013. For all the talk of online video advertising, companies offering ad insertion services and platforms for premium content owners haven’t had much success in becoming profitable and/or scaling their business. The market for these services, while very crucial to content owners, is too small and will stay so for a very long time. While Unicorn is tiny, even the two largest vendors in this market, Brightcove and Ooyala, have raised almost $275M to date but still aren’t profitable. It takes far too much money to scale an online video platform business, especially when these vendors still get a large percentage of their revenue from the re-sale of CDN bandwidth and not from cloud platform services. Once companies in this sector grow to around the $100M mark, it gets very hard for them to grow their business at the rate they are accustomed to.
It also doesn’t help that vendors continue to set expectations in this market that aren’t realistic, which Brightcove seems to have a habit of doing. I get that they are excited about the market they are in, I am too. Having passion is a good thing. But you have to temper that passion with setting the proper expectations in the market and being realistic. Brightcove made this mistake when in their S-1 filing before their IPO they said the, “total potential market opportunity was approximately $2.3 billion in 2011, growing to approximately $5.8 billion in 2015”. And I cringed when I read today’s press release that quoted a high-level, generic research report on the online video ad market saying, “the online video advertising market represented $10.4 billion U.S. dollars in worldwide spending in 2013, with spending expected to grow to $16.8 billion by 2015.” Using these numbers, the size of the market Brightcove is going after is more than $13B, which means for 2013, Brightcove would not have even captured one half of one percent of the market. Yet, they have the most revenue of any other vendor. So how can the market be as big as these numbers say? It can’t. Again, I get the excitement some vendors have for what they are doing, Brightcove included, but set the right expectations.
Unicorn Media does have some unique intellectual property as they have been issued 14 U.S. patents and 7 international ones with 20 additional patents pending. Maybe that would explain why Brightcove game them the high valuation they did, but patents are only worth something if you can enforce them. It takes a lot of effort and money to enforce patents and I don’t see that being a business Brightcove is looking to get into, patent enforcement and/or licensing. As part of the deal, Unicorn’s CTO will be become the new CTO of Brightcove and Unicorn’s CEO will become SVP, Market Development for Media, which is a new group Brightcove has created inside the company to, “define and bring to market focused solutions that help media companies increase their revenue and decrease costs.” How this goal is any different from what Brightcove is and has already been doing for years with media companies is not clear to me.
As with any deal like this where a lot of technical integration needs to be done between multiple platforms, the success of this deal is going to be judged on how well both companies combine what they have. Based on what needs to take place, the companies have a lot of work cut out for themselves. Rather than me try to explain it, here’s what the CEO of Brightcove said in a blog post, “We plan to integrate Once technologies with future versions of Brightcove Video Cloud and Brightcove Zencoder. Over time, Video.js and other Brightcove Web players and native player SDKs will integrate with OnceUX technologies to support instrumented playback of Once streams. In a similar fashion, Video Cloud will eventually integrate with Once for video on-demand streaming, and Video Cloud Live and Zencoder Live Cloud Transcoding will integrate with OnceLIVE for fully monetized live event streaming.” That’s a lot of integration. No date was given as to when they expect it all to be completed.
In 2012, Brightcove spent $30M to acquire Zencoder which was projected to do $2M in revenue for the year. Add in the Unicorn Media deal and Brightcove has now spent $79M in two deals for two companies that combined, will add $12M-$14M in revenue in 2014. I understand where the pieces that Zencoder and Unicorn bring fit into Brightcove’s ecosystem, which does make their platform stronger, but the valuation they gave both companies was way too high. Brightcove is making some huge bets as to the future of this market and while there is nothing wrong with that, you have to be realistic on what’s really transpiring in the market and how quickly it will grow. Saying in your press release that you “believe that online video has the potential to surpass traditional TV” is simply buying into the hype. If the market Brightcove is targeting is really more than $13B dollars this year, how are they only expecting to grow their business as a whole by 10%? These inflated market projections that many vendors all use are simply that, inflated and not realistic.
When it comes to doing ad insertion, in particular for live streaming, it’s hard to make it work right. Even if you can do it, the market is and will be small for many years to come as there is more VOD content available than live. Plus even when it comes to the smaller live ad insertion market, it’s a crowded arena. Vendors who have solutions, or are working on solutions for live ad insertion include mDialog, Yospace, Jivox, Ooyala, Blackarrow, Vubiquity, FreeWheel, Azuki Systems, Adobe, Volar Video and others. Some of these companies are still working on such solutions and others may not work as well as advertised, in fact some don’t, but the point is there are a lot of vendors in the market trying to solve the same problem, for a market that can realistically only support a few of them. Remember when there was 20 OVP vendors in the market? Or 25 CDN providers? There aren’t that many anymore because the market for these services is not as big as many vendors say it is.
Not to mention, the fragmentation in the online video advertising world is a nightmare as no standards exist, which keeps the market for online video advertising services from growing quickly. You have physical ad insertion vs. ad/campaign management and content ops vs. ad ops with no overlapping server-side insertion functionality between the two. Add in the fact that there is a lot of strategy involved with premium content owners trying to find the balance of how much content is streamed on the Internet vs. protecting their legacy cable TV ratings, and stream stitching for ads is only one small part of the problem. A larger business problems exists in addition to the technical one.
I respect Brightcove for what they have done. They basically created the industry they are in. They are passionate, they love what they do and from everything I have seen and heard, they treat employees well and treat customers with respect. But they have to set realistic expectations not only for Wall Street, but also for the rest of the industry. I talk to a lot of Wall Street money managers about Brightcove’s business and many don’t find them a compelling story anymore. They always say to me, “I expected the market for these services to grow faster and be larger.” And it’s not just Wall Street Brightcove has to set the right expectations with.
As long as Brightcove is the leader in this market for these services, based on revenue, others look to them for the valuations they put on the acquisitions they make. Like it or not, Brightcove is the barometer for the online video platform industry and everyone notices what they do. Eighteen months after Brightcove’s acquisition of Zencoder, we have no data points from the company to show if it was a success. I hope after the Unicorn Media acquisition is closed and the platforms integrated, the company will provide the industry concrete evidence as to what’s really taking place in the online video ad market, with real numbers on how it is growing.